The Subprime Car Loan for People With Bad Credit

Car loans for people with bad credit are typically very expensive. Bad credit loans tend to have higher interest rates than traditional loan options. A subprime loan can provide a loan for a borrower, but it also poses several risk factors in the future.

What is Subprime?

Subprime simply means the initial interest rate on your car loan is below the national prime rate set by the Federal Reserve. If the lender does not raise your interest rate in the future, the loan would actually result in a loss for the lender. Because of this, most subprime loans have variable interest rates.

Advantages of Subprime

The main advantage of a subprime loan is it makes financing less costly in the beginning of the loan. Then, once you have a better ability to pay the loan in the future, rates and payments will go up. This is best for students who have recently graduated or other people who think their income will grow drastically within a few years.

Dangers of Subprime

The main problem with this formula is the rates can adjust so high that, even at a higher income, you cannot afford to make loan payments. The risk of this happening on a car loan is lower than on a mortgage loan, as long as the car loan term is relatively small and fairly short.

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